Tentative Translation

Recommendations for Vitalizing

Financial and Capital Markets

December 13, 2013

Panel for Vitalizing Financial and Capital Markets

* This translation is prepared solely for information purposes. The Japanese version should be referred to for the accurate content of this recommendation.

Panel for Vitalizing Financial and Capital Markets

Members

(Chairman) Takatoshi ITO Professor, Graduate School of Economics,

The University of Tokyo

Yoichiro IWAMA Chairman,

Japan Investment Advisers Association

Masayuki OKU Chairman of the Board,

Sumitomo Mitsui Financial Group, Inc.

Yorihiko KOJIMA Chairman of the Board,

Mitsubishi Corporation

Atsushi SAITO Director and Representative Executive Officer,

Group CEO,

Japan Exchange Group, Inc.

Naoyuki YOSHINO Professor, Graduate School of Economics,

Keio University

(Secretariat)

Financial Services Agency

Ministry of Finance

(Observers)

Bank of Japan

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Overview

1. Since the burst of the economic bubble, the Japanese economy has

found itself in a prolonged “deflationary trap.” The firm expectation among

companies and households that deflation will continue has led to a very

large portion of the financial assets of households and public pension

funds being allocated as cash and deposits, and hence the risk money

provisions and funding for growing businesses are limited.1 Companies

curbed their long-term capital investments, resulting in stagnant corporate

earnings and share prices, as well as a sluggish rise in workers’ wages. As

a consequence, the Japanese economy fell into a vicious cycle in which a

drop in aggregate demand self-fulfills a deflationary expectation. (Under

such situation, Japan’s financial and capital markets have remained

stagnant for a long time, and have resulted in claims that its international

presence has diminished.)

Since the start of the Abe administration in December last year, the

Japanese economy is currently in the process of leaping back to a positive

equilibrium rendering sustainable economic growth out of a negative

deflationary equilibrium by fostering growth expectations among

households and companies with the “three arrows” of Abenomics: the first

arrow being bold monetary policy; the second being flexible fiscal policy;

and the third being a growth strategy to stimulate private investment.

In order to bring the momentum for revitalizing the Japanese economy

to the next stage, where a sustainable and vibrant society is to be

established based on the positive equilibrium, and to deepen the growth

strategy, it is essential to focus on the structural problem of depopulation

and the aging of society. Firstly, with the decline in the working population,

an environment to enhance the per capita productivity and

competitiveness of companies is required. Secondly, with a decline in

household savings and a continuation of trade deficit expected, all sorts of

assets built up over years need to be utilized more effectively for the future

1 These assets are sometimes referred to as being “inactive.” In a deflationary environment, this was a rational economic decision to some extent, and had been partially directed to finance government bonds.

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and then to revitalize the Japanese economy. Thirdly, it is necessary for

Japan to grow and evolve along with economies with growth potential, by

promoting the expansion of human resources, goods, funds, and

information across borders, as well as by attracting them to the Japanese

markets.

Following the burst of the bubble economy, the Japanese financial

system has restored its soundness after overcoming the financial crisis

and the non-performing loan problem, and has since remained sound even

through the global financial crisis. The Japanese financial system must

now play an active role in ensuring that the economy leaps back to the

positive equilibrium and in sustaining a vibrant society under such

equilibrium. In other words, as part of “the third arrow,” a strategic

structural reform policy aimed at enhancing growth potential must be

pursued in financial and capital markets as well. This effort is exactly what

is required to turn the above vicious cycle into a positive cycle and fully

accelerate the development.

In particular, financial assets held by households, which amount to

nearly 1,600 trillion yen, and public pension funds, are expected to be

mobilized as risk money and funding for growing businesses, while having

the decline in the real value of the those assets minimized in an

inflationary environment. Measures should be taken to enhance this shift

of financial assets.

Furthermore, with Asian economies growing rapidly, Japanese

companies and financial institutions are proactively expanding overseas,

to Asia in particular, as Japan’s birthrate declines and its population ages.

Considering such global expansion, it is important to contribute to the

enhancement of the market functions in the Asian region as a whole and to

the development of Asian economies by providing maximum support in the

financial area to help Asia exert its full potential. In order to pave the way

for the Japanese economy and financial and capital markets to grow along

with the Asian economies, it is also important to support Asian countries in

developing their financial infrastructure, as well as to develop a business

environment that is essential for Japanese companies and financial

institutions to operate in Asian countries. It is also necessary to take

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measures to assist foreign investment in Japan so as to achieve a more

sophisticated and competitive Japanese economy.

At the same time, with the companies in Asia rapidly increasing their

competitiveness, Japanese companies, which have just started to engage

in forward-looking investments in the midst of the move away from

deflation, need to further enhance their competitiveness by reforming their

management structure and industrial structure. From the viewpoint of

providing risk money and funding for growing businesses, companies are

expected to increase their attractiveness for investment, while financial

intermediaries and asset managers are expected to provide diverse and

attractive financial products and services. In light of this, measures need to

be taken strategically aiming at dramatically enhancing comprehensive

financial expertise, such as financial institutions ’ abilities to identify

companies with growth potential and help their growth by providing

consulting services, their abilities to provide high-quality products and

services, and the abilities of institutional investors and asset managers in

fund management. Moreover, in order for Japan to grow alongside with

Asia, it is important for Japanese companies to actively expand to Asia on

the premise of active and healthy turnover in Japanese industries and

companies, while at the same time, to win the confidence from foreign

peers in the competitiveness and management skills of Japanese

industries and companies.

Furthermore, in order to change the flow of funds and to increase the

attractiveness of Japan’s financial and capital markets globally, in addition

to reviewing financial regulations, it is necessary to secure and develop

highly-skilled human resources with high levels of global business

expertise in respective industries including institutional investors and

financial institutions. It is also necessary to enhance the attractiveness of

various business and living environments surrounding Japan’s financial

and capital markets. These reforms concerning the underlying business

and living environment are also important in the context of maintaining and

enhancing the international competitiveness of Japan ’s financial and

capital markets.

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2. Meanwhile, manufacturing is Japan’s strength when aiming to

maintain and develop the country’s international competitiveness. When

considering the growth strategy for financial and capital markets, it is

important for financial institutions and industries to establish a relationship

in which the two grow in tandem, just like two wheels of a cart. This

relationship, built through a process where financial institutions not only

provide financing to industries, but also provide industries with highly

value-added consulting and utilize discerning abilities for growth potentials,

which in turn, leads to value creation in real economic activities, is

important. It should be noted that vitalization of financial businesses not in

tandem with the development of real economic activities will not lead to

sustainable growth.

Furthermore, the long-term outlook of the macro-environment

surrounding Japan’s financial and capital markets suggests that Japan’s

fiscal situation is in an unfavorable condition where government debt has

reached twice the size of the country’s economy. Ensuring fiscal

sustainability is becoming increasingly important in promoting the supply

of money for growth and achieving sustained growth with stable price

levels, while at the same time maintaining the stability of the

government-bond market. From this perspective, it is important to strive

resolutely to ensure the country’s fiscal soundness.

3. Despite several initiatives to reform financial and capital markets

aiming at vitalizing the economy by providing risk money and funding for

growing businesses, it is difficult to say that these efforts have been highly

successful in a situation where deflationary expectations were pervasive

and deep rooted. Now, however, with the fostering of inflationary

expectations, risk-taking in asset management has become increasingly

rational, while funding demand for infrastructure development is strongly

recognized. Now is a precious opportunity to truly vitalize financial and

capital markets. It is desirable to proceed with the vitalization of financial

and capital markets while affluent stock of household savings still exists.

The expectations for, and attention to, the Japanese economy from

home and abroad have risen to levels not seen in recent years due to the

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ongoing implementation of Abenomics and the selection of Tokyo as host

city for the 2020 Olympic/Paralympic Games.

It is important to take advantage of this opportunity to vitalize the

financial and capital markets by, for example, setting the goal of

establishing a leading position as an international financial center by 2020

(aim at becoming Asia's number one international financial center in 2020),

drawing a picture of each issue in 2020, and strategically and boldly taking

measures to realize such goal while keeping in mind the image of 2020 for

each area of challenge.

4. In this recommendation, with a picture of 2020 in mind, specific

policies to be realized in the next seven years are stated with regard to the

following four areas:

(1) Establishing a positive cycle in which abundant financial assets held

by households and public pensions are allocated more to funding for

growing businesses (Utilizing “inactive” funds)

(2) Realizing Asia’s growth potential, improving the market function of the

Asian region, paving the way for integral growth of Japan and Asia

(Supporting the development of financial infrastructures in Asian

countries and fostering a necessary environment for Japanese

financial institutions and companies to conduct business in Asia

through cooperation between the FSA and relevant authorities)

(3) Strengthening corporate competitiveness and promoting

entrepreneurship

(4) Developing human resources and establishing a better business

environment

Additionally, the seven-year period is divided broadly into the following

two stages:

-- In the first stage, with the current monetary easing aimed at achieving

the price stability of 2% in terms of the year-on-year rate of change in

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the consumer price index (CPI) at the earliest possible time, with a time

horizon of about two years, measures to be launched immediately and to

be addressed within one year or so from 2014 are entailed. A course for

the transition to an economic structure suitable for an positive

equilibrium should be set by presenting a vision of the future to

encourage expectations, and structural reforms should be commenced.

-- In the second stage, measures to ensure the positive cycle of funds in

the course of exiting from deflation, and agenda for accelerating and

boldly tackling structural reforms are entailed. While such agenda

should also be addressed immediately, some of them will take time to

become fully effective, and others are related to the reform of the

underlying businesses and living environments, such as the

development of human resources and governance reforms.

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1. Establishing a positive cycle in which abundant financial assets

held by households and public pensions are allocated more to

funding for growing businesses (Utilizing “inactive” funds)

1-1. Establishing an environment to enable asset building by

households in line with lifecycles

To exit from deflation and to make a definitive transition to a positive

equilibrium, contribution should be made to build up Japanese public

assets. To this end, measures should be taken so that funds such as

household assets nearing 1,600 trillion yen2 and public pensions are

adequately managed, and risk money and funding for growing

businesses are supplied through such measures.

By 2020, such environment should be created where households’

proper investment activities, which are in accordance with their life-cycle,

are adequately supported. With that in mind, firstly, high quality financial

education should be provided to enhance the financial literacy of each

household. Secondly, financial advisory services, which provide

appropriate financial information with primary attention to client interest,

should be prompted.

From this perspective, the following issues should be addressed

immediately.

With regard to the Japanese version of the Individual Savings

Account (NISA) scheme, which will be launched in January 2014, efforts

in the public and private sectors to encourage its use should be

continued. At the same time, the government should make the scheme

more convenient, for instance, by making it possible to switch a NISA

account to a different financial institution on an annual basis.

Furthermore, from the perspective of broadening the range of investors

and expanding the provision of funding to growing businesses,

2 A breakdown of household assets in Japan reveals a high percentage of cash and deposits, while that of stocks and investment trusts is about 10%, a level lower than most Western countries and below the level in the 1980s prior to the bubble (average of 20% at that time). Net household assets excluding household debts amount to 1,233 trillion yen (as of end of June 2013).

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consideration should be made, taking into account the actual usage

and its effect.

As to investment trusts, approaches should be taken to develop and

promote products suited to the lifecycle of customers ranging from the

young to the elderly. Sales and marketing style with an emphasis on

sales commission from short-term switch of products should be

reexamined, and the transparency of fund management should be

improved. Strong initiatives should be taken to foster the development

and the promotion of products that place priority on the individual

investors’ interests and truly suit the customers ’ investment objectives

and needs, in line with each investor ’s life-stage. Further, in relation to

sales of products, it is necessary to pick and offer the products that

match the needs of individual investors and lead to long-term asset

building.

With regard to public and quasi-public funds, such as the

Government Pension Investment Fund (GPIF), necessary measures

should be taken in line with the Final Report of the Panel for

Sophisticating the Management of Public/quasi-public Funds (released

on November 20, 2013), which recommends a review of the fund

management and governance structures in view of the exit from deflation.

Especially, given the extreme importance of securing human resources

to carry out sophisticated investment and risk management, expert

personnel should be recruited.

In order to diversify the investment of the GPIF, for example, it would

be effective to jointly invest with overseas pension funds by utilizing the

know-how of the Development Bank of Japan (DBJ). In addition, the

financial functions of the Japan Bank for International Cooperation

(JBIC) will be enhanced, and with investments from GPIF and other

funds in mind, consideration will be given to the liquidation of claims

pertaining to infrastructure projects. Taking the outcome of consideration

into account, GPIF will carry out a study on the diversification of its

investment portfolio.

At major financial centers around the world, demanding eyes of

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pension funds and government funds have led institutional investors and

asset managers to compete with each other by enhancing their skills .

With this in mind, for instance, one effective means to enhance the

quality of the operation and management of asset management

companies, which manage investment trusts and pension funds ’ assets,

would be, for example, to foster and enhance asset management

companies by having GPIF appropriately select its asset managers. In

such case, it would also be effective for asset owners, such as pension

funds, to encourage asset management companies to have an

adequate fund management base and an information hub function in

Japan’s financial and capital markets.

The JPX-Nikkei Index 400, comprising companies deemed attractive

for investments with due considerations to factors such as high ROEs

and independent directors, will start to be calculated in January 2014.

For the promotion and development of products tracking the index, the

proactive use of the index by a broad range of investors including public

and quasi funds would be preferable.

In addition, there is a view that executives and employees of listed

companies, while having the financial ability and literacy to engage in

investments, are overly cautious in holding stocks due to the insider

trading regulations. To address this, revisions to the in-house rules and

amendment of the regulations on insider trading may be required. The

diffusion of financial products outside the scope of the insider trading

regulations, such as investment trusts, would also be effective.

More fundamentally, as part of fostering an environment for adequate

risk-taking in line with individuals’ life-cycles, enhancement of financial

and economic education is essential. It is extremely important to raise

the level of financial literacy among elementary and secondary school

students, working adults as well as the elderly.

As the next step, the following issues should be addressed.

Further measures to improve individuals’ financial literacy and to

encourage investment should be discussed in view of the experiences

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from the promotion of NISA while Abenomics realized its effects.

Furthermore, private pensions should be reviewed following the

considerations of all pension funds, with a view to promoting investment

by working generations in line with their lifecycles.

As for investment trusts, the situation of development and sales of

products after the introduction of NISA should be reviewed, and with the

cooperation between public and private sectors, further measures

should be taken to develop and promote products that truly meet the

investment objectives and needs of customers.

With regard to GPIF and other similar funds, efforts should be made

to realize the desirable fund management, risk management, and

governance structure in line with the recommendations made by the

Panel for Sophisticating the Fund Management of Public/Quasi-public

Funds.

Efforts should also be made to further utilize and promote indexes

focusing on investment returns, such as JPX-Nikkei Index 400.

Financial and economic education should be further developed by

accelerating cross-industry efforts among sectors such as banking,

securities, insurance, and asset management.

1-2. Improving the market environment and increasing the

attractiveness of the market

With funds such as financial assets held by households and public

pensions being steered toward investment, it is critical to set in motion a

virtuous cycle by expanding Japan’s markets in both volume and scope,

as well as by improving the attractiveness of the markets.

In 2020, the Tokyo market should be able to meet various funding

needs on par with other major financial centers and become a solid

market offering foreign and domestic investors a variety of investments

in a timely fashion.

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Infrastructure financing is a method for financing the development of

infrastructures through investment by funds and lending by financial

institutions. With infrastructure financing, large funding demand is

expected in developing countries, such as countries in Asia. In Japan, it

is an effective tool for developing various infrastructures, as well as for

enhancing both the quality and quantity of healthcare facilities in

response to the aging society. Considering these factors, a vibrant

infrastructure-financing market should be fostered, and efforts should be

made so that the private sector plays an active part in such market.

In line with these efforts, the Japan Exchange Group, as a

Comprehensive Exchange, will list a variety of financial products, such

as foreign and domestic companies’ equities, as well as derivatives

(including financial futures) of those products and commodity derivatives.

It will firmly establish its place as the top-level market in Asia attracting

various foreign and domestic investors.

Supplying funds for growing businesses through capital markets and

fostering an infrastructure financing market will meet the adequate

investment needs of funds, such as financial assets held by households

and public pension funds, amidst the falling birth rate and aging

population. It will also lead to providing companies with risk money and

funding for growing businesses, at the same time enabling infrastructure

improvements with lower fiscal burdens.

From this perspective, the following issues should be addressed

immediately.

While financial and commodity markets are being strategically

integrated overseas, the idea of working to develop a Comprehensive

Exchange has been put forth in Japan as well, in strategies such as the

“Implementation Plan for Regulatory Reform” (Cabinet decision made on

June 14, 2013). Efforts should be made to realize a Comprehensive

Exchange.

It is also recommended that measures be taken to expand the supply

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of funds into markets. One effective means is for the Tokyo Stock

Exchange to create a listed infrastructure fund market and for the

government to support such effort. Other possible means include

promoting the development and diffusion of products tracking the

JPX-Nikkei Index 400, encouraging the utilization of PPP and PFI,

fostering an environment for the development of infrastructure funds and

health care REITs, and liquidating claims of JBIC.

In addition, bearing in mind the particularity of Japan in that it is

located especially in the far-east corner of Asia, efforts should be made

to expand the trading hours of the Tokyo Stock Exchange, which are

short compared to major overseas exchanges.

Moreover, in line with the “The Present Policy on the Application of

International Financial Reporting Standards (IFRS)” (June 19, 2013)

published by the Business Accounting Council, necessary measures

should be taken to build up the examples of voluntary application of the

International Financial Reporting Standards (IFRS) in Japan and

strengthen Japan’s capability to have its opinions heard in the

development of IFRS.

Furthermore, with regard to foreign exchange reserve management,

it is recommended to utilize external fund managers and their knowledge

with due consideration of the impact that it may have on the foreign

exchange market.

As the next step, the following issues should be addressed.

First of all, a wide variety of financial products, including commodity

futures and infrastructure funds, should be traded in the market and the

range of investors should be broadened.

By realizing a Comprehensive Exchange, the product line-up

including commodity derivatives at the exchange should be broadened,

and the attractiveness of markets including the commodity markets

should be increased.

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To make Japan’s financial businesses more efficient, more advanced

IT systems should be employed to realize paperless transactions. The

Social Security and Tax Number System (the “My Number” system)

should be actively utilized in financial operations to enable the

streamlining of name-based aggregation, and considerations should be

made to provide customers with prompt and accurate financial services.

In addition, to reduce the risks pertaining to securities settlements,

steady progress should be made to shorten the settlement period of

securities. It is also important to speed-up the reform of the corporate

bond market by enhancing access by companies with comparably low

creditworthiness.

In addition, stronger foundations in terms of legislation and human

resources are required for strengthening the competitiveness of markets.

The quality of audit also needs to be enhanced to maintain and ensure

international confidence in the auditing system in Japan. To this end, it is

crucial to make the certified public accountant qualification more

appealing.

2. Realizing Asia’s growth potential, improving the market function

of the Asian region, paving the way for integral growth in Japan

and Asia

2-1. Promoting support for developing financial infrastructure in

Asian countries

In 2012, Asian emerging and developing countries accounted for

25% of the world’s GDP and achieved a real growth rate of 6.4% (World

Economic Outlook, IMF). With a view to contributing to Asia’s economic

development and improving the market functions of the whole region,

thus achieving growth alongside Asia, it is important that Japan, by

strengthening cooperation between FSA and other countries’ respective

authorities, provides various support to enhance market functions in

Asian countries as a whole. This includes support for the development of

financial infrastructure and improvement of the business environment for

Japanese companies and financial institutions.

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Some countries in Asia, e.g., Cambodia, Lao PDR, Myanmar,

Vietnam, and Mongolia, have financial infrastructures (e.g., financial

systems) in the process of development. Japan needs to contribute to

the growth of Asia and improve the market functions of the whole region,

by providing support tailored to different levels of development in

financial infrastructure in each country. Such support includes: (1)

developing “soft infrastructure” such as regulations; (2) developing “hard

infrastructure” such as introducing an IT system in the settlement system

and establishing/operating stock exchanges; and (3) sharing knowledge

and experiences in areas such as financial administration and disaster

management. Developing financial infrastructures in Asian countries will

also help Japanese companies and financial institutions to expand

businesses in these countries.

In order to promote the above-mentioned technical assistance, it is

essential that Japan closely cooperates with financial authorities in Asia.

Japan will promote the constructing of a framework that leads to

achievement of this goal as soon as possible, and proactively promote

the exchange of human resources through such framework as the “Asian

Financial Partnership Center” (tentative name), which is planned to be

established within FSA in the next fiscal year. Considerations should

also be given to how to address various challenges with regard to Asian

financial and capital markets, including Japan’s, as well as how to

provide technical assistance in a systematic manner. Outcomes of such

considerations should be utilized to promote the support for developing

financial infrastructures in Asia and to strengthen the roles that the

Japanese financial and capital market and financial institutions play in

Asian countries.

Enhancing the cooperation between FSA and financial authorities in

Asian countries through these efforts will contribute to facilitating

business development by Japanese companies and financial institutions

in those Asian countries. In addition to developing financial

infrastructures, efforts should be made to encourage finance-related

business professionals, including lawyers and accountants, to expand

into Asia, so that Japanese financial experts can play active roles in the

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Asian countries where Japan is providing assistance.

2-2. Facilitating corporate funding and lending in Asian countries

Regulations on foreign currency exchange and capital controls still

remain in many Asian countries. At the same time, transactions in their

local currencies have expanded in line with their economic

developments.

In 2020, the relationships between Asia and Japan will be tightened,

with regard to human resources, goods, capital, and services. Hence, in

order for Japanese companies venturing into and expanding in Asian

countries to steadily obtain funds and operate their businesses, Japan’s

institutional systems and infrastructure should be highly developed,

thereby to realize an environment where said Japanese companies can

easily obtain local currencies as well as efficiently conduct cash

management on a global basis, including at overseas business locations.

Efforts should also be made to strengthen the financial and market

stabilization functions of Asian markets and to establish markets and

infrastructures for cross-border cash and securities transactions and

settlements.

From this perspective, the following issues should be addressed

immediately.

In response to Japanese companies’ needs for ways to facilitate their

obtaining of local currencies, it is important to steadily take necessary

measures that enable Japanese financial institutions to serve as agents

or intermediaries for transactions between foreign banks and Japanese

companies.

Support from public sector financial institutions should be enhanced.

Such support includes local currency-denominated private sector

investments and finance by the Japan International Cooperation Agency

(JICA) and guarantees for inter-bank currency swaps by the JBIC.

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To bring greater efficiency to cash management of Japanese

companies, relevant regulations should be revised so that the

companies can build optimal cash management systems as a group that

includes their foreign subsidiaries.

In addition, consideration will be given to the feasibility of direct

trading between Asian currencies and Japanese yen, in lieu of the

current cross-trading through USD. As part of such efforts, it is important

to support private entities participating in the Asian-wide ATM

inter-linkage network.

In the next step, the following issues should be addressed.

Further improvements must be made to Japan ’s financial market

infrastructures, such as extension of the operating hours of the Bank of

Japan Financial Network System (BOJ-net), to foster an environment to

make it easier for Japanese companies and financial institutions to

smoothly access local currencies and manage cash efficiently on a

global basis, including their overseas business locations.

In addition, it is necessary to strengthen financial and market

stabilizing functions of Asian markets. To this end, it is important to

foster cross-border collateral arrangements, a scheme that enables

central banks of Asian countries to supply local currency by using

Japanese government bonds as collateral, to ensure the stable funding

of local currencies.

In order to strengthen the regional financial safety net, it is also

important to enhance bilateral swap arrangements with Asian countries.

Furthermore, through regional financial cooperation, market

functions of the whole Asian region should be enhanced. To foster a

stable financial intermediary mechanism, corporate bond markets should

be enhanced. In addition, the facilitation of cross-border securities

investment and cross-currency transactions should be enhanced by

developing infrastructures for intra-region cross-border securities

settlements. It is also important to develop a settlement environment for

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retail remittances.

2-3. Strengthening the functions of the Tokyo markets as a global

financial center supporting global development

For Japan’s economic growth, it is necessary to contribute to the

economic development of Asian countries, and to enhance the market

functions of the region, as well as to pave the way to growth along with

other countries, including Asian countries.

For this purpose, it is important to efficiently intermediate global

funds that invest in growing sector and seek investment destinations in

the growing Asia and to contribute to Asia’s development, as well as to

bridge such development to the growth of the Japanese economy by

transforming Tokyo into a global financial center in Asia. Economic

growth of Japan will set in motion a virtuous circle that will accelerate the

development of Tokyo as a global financial center. To this end, diligent

efforts need to be undertaken promptly, in view of the accelerating

financial system reforms in the region. At the same time, it is necessary

to take measures to encourage foreign companies to invest in Japan,

and to utilize such investment for achieving a more sophisticated and

competitive Japanese economy. When working on such measures, the

strengths and the weaknesses of Japan ’s financial sector should be

taken into consideration.

In 2020, it will be necessary for the Tokyo market to meet diverse

needs from domestic and foreign investors. For example, it is pursued

that the listing of foreign companies, and the issuance and trading of

yen-denominated and foreign currency-denominated bonds in the Tokyo

market be as active as those in Hong Kong and Singapore. At the same

time, efforts will be made to facilitate the trading of Asian currencies on

the Tokyo market so that the market will function as a global market hub

for cross-currency transactions of Japanese Yen, US Dollar, Renminbi,

and others. In addition, as a medium- to long-term strategy, foreign and

domestic infrastructure funds should be established and listed on the

Tokyo market to strengthen infrastructure-related project finance, an

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area in which Japanese financial institutions are already among the top

in the league table, along with measures to improve the ability to

syndicate loans, so that the demand for infrastructure improvement at

home and abroad is fulfilled.

From this perspective, the following issues should be addressed

immediately.

The beginning and the ending dates of the fiscal year of business

reports required to Financial Instruments Business Operators under the

Financial Instruments and Exchange Act sometimes differ from those of

the accounting year of overseas institutional investors and securities

companies. The regulation should be revised to lighten the compliance

cost.

Efforts should also be made to vitalize the Tokyo Pro-Bond Market, a

market offering great convenience for overseas issuers (the listing

procedure is to be simplified and made flexible, e.g., both English-only

disclosure and program listing will be allowed in the Tokyo Pro-Bond

Market). Specifically, considerations are needed to amend regulations as

necessary, and to utilize DBJ (establishing a framework for investment in

the Tokyo Pro-Bond Market).

Furthermore, the issuance of samurai bonds should be encouraged

by expanding the scope of JBIC’s guarantees and the acquisition

framework for samurai bonds.

Japanese financial institutions need to make efforts to attract direct

investment in Japan from Asian companies by, for instance, enhancing

“reverse search” services (i.e., matching services provided to Asian

companies that wish to collaborate or merge with Japanese companies).

As the next step, the following issues should be addressed.

It is important to facilitate cross-border bond issuances and

transactions, as well as cross-currency transactions in the Tokyo market,

in order to make efforts to further improve the environment for the

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financing of Asian currencies in the Tokyo market and strengthen the

market function on an Asian-wide basis. To this end, it is necessary to

make progress on the standardization of bond issuance procedures and

development of a settlement environment for foreign

currency-denominated bonds.

Improvements of legal stability with regard to cross-border securities

issuances and derivatives contracts, including legal status in a

bankruptcy, will be important in securing stability and transparency in

financial markets.

With the size of the Islamic financing market growing, providing

support for developing Islamic financing through JBIC is also an effective

measure.

Additionally, it is important to build Tokyo as a hub for finance-related

information and thus a global financial center in Asia. This can be done

by holding international conferences where financial experts and

policymakers gather, as well as by creating venues that would bring

together representatives from the industry, government, and academia

(e.g., a Japanese-version of the Davos Conference or Chatham House).

3. Strengthening corporate competitiveness and promoting

entrepreneurship

3-1. Promoting entrepreneurship and new ventures

To vitalize the Japanese economy, reforms in the financial and capital

markets must be pursued in tandem with the reforms in the real economy,

just like two wheels of a cart. This will require making available

appropriate financing in accordance with the stage of a company’s

growth: startup, listing, business expansion, and overseas development.

Although Japan possesses technologies that could serve as business

seeds, they have often not resulted in business startups.

In 2020, the startup rate of Japan should be raised to 10% (current

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rate: 5 %). While the number of initial public offerings (IPOs) in Japan

has rebounded since the Global Financial Crisis, the number is not

necessarily high and should also surpass those of Hong Kong and

Korea.3

To this end, funds must be appropriately supplied to stimulate

innovation and to promote entrepreneurship and new ventures. Creating

a cluster where venture businesses, research institutions, venture

capitals and other relevant institutions gather would also be important

from the viewpoint of supporting entrepreneurship efficiently.

From this perspective, the following issues should be addressed

immediately.

The Financial System Council’s “Working Group on the Provision of

Risk Money to Emerging and Growing Companies” is currently studying

the possible improvements to encourage business startups and new

ventures. Crowdfunding should be promptly established as a means of

pursuing the supply of risk money needed to commercialize technologies

and ideas, and burdensome requirements for new listings should be

eased to encourage companies to list.

As the next step, the following issues should be addressed.

First, it is important to establish an environment which enables

companies at the stage of R&D and startup to procure funds easily by

utilizing crowdfunding, which connects new or growing companies and

investors through the Internet.

At the same time, considering the importance of providing equity

funding and support for commercializing businesses, in addition to

providing funds, supportive measures such as hands-on support in

commercializing ideas and technologies, provision of managerial staff

and networking of personnel with expertise, should be strengthened by

3 The numbers of IPOs throughout the year in Japan (TSE), Hong Kong, and Korea (average listings from 2010–2012) are 48, 92 and 70 respectively (WFE).

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promoting enhanced actions by the financial group as a whole.

3-2. Strengthening corporate governance to improve the medium- to

long-term competitiveness and management capabilities of

companies

In order for the financial and capital markets and industries to

develop in tandem like two wheels of a cart, reforms of financial and

capital markets and enhancement of corporate competitiveness will need

to be conducted in parallel over the medium to long term, and

companies’ management capabilities needs to be improved. Winning the

confidence of overseas investors in the competitiveness and

management capabilities of Japanese companies is also a key issue.

In 2020, dynamic and sound turnovers and restructurings will take

place among companies and businesses within companies, second

chances will be broadly allowed, and new businesses will evolve and

grow actively. In addition, society will be one in which many truly global

companies flourish as attractive investment destinations over the mid to

long term.

From this perspective, the following issues should be addressed

immediately.

While examining their managerial strengths and weaknesses, such

as teamwork in the field and technological competence, companies

themselves should make efforts to reform their business by selecting

sectors with growth potential and concentrating their resources in such

sectors. By achieving high-quality corporate governance and securing

shareholder returns on equity (ROE) on par internationally, the

competitiveness of companies should be enhanced. From the

perspective of promoting such efforts and thus realizing higher ROE of

Japanese companies, development and promotion of products tracking

the JPX Nikkei Index 400 should provide Japanese companies with

effective incentives. Accordingly, these products should be used widely

in the asset management of GPIF and other funds.

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To bring about high-quality corporate governance, companies should

introduce outside (independent) directors in line with the partial revisions

to the Companies Act submitted to the Diet in November this year and

the revisions to the listing rules of the Tokyo Stock Exchange, which are

expected to be implemented in February 2014. In line with such

movements, it is necessary to encourage listed banks and banking

holding companies to introduce independent outside directors through

the supervision of financial institutions.

In addition, a wide range of institutional investors, including asset

managers (asset management companies) and asset owners (pension

funds, etc.), should engage in constructive dialogues with companies to

encourage their efforts to enhance the management capabilities. To this

end, it is necessary to promptly draft the Japanese Version of the

Stewardship Code, which is now under discussion. In addition, the FSA

needs to publish the list of institutional investors that accepted the Code,

as well as their disclosure statuses in accordance with the Code, and to

fully disseminate the Code both at home and abroad.

As the next step, the following issues should be addressed.

First, further development and establishment of market indexes

which focus on the growth potential of companies will effectively promote

turnover in companies and give them incentives to select and focus on

growth sectors. Consideration should also be given to the modalities of

business restructuring and insolvency, in reference to the trends in

Germany and elsewhere, to ensure that companies have sound turnover.

Attention should also be paid to the state of corporate governance,

taking into account the degree to which outside directors have been

appointed in line with the supplementary rules to the partially amended

Companies Act, and to further approaches to strengthening corporate

governance.

Further improvements should be made to the Japanese Version of

the Stewardship Code through periodic reviews in light of the degree of

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implementation of the Code, including its acceptance and disclosure

among institutional investors. Periodic reviews should be undertaken to

raise the awareness among institutional investors and thereby to further

firmly establish the Code as standard practice.

3-3. Considering growth potential in financing by financial

institutions

In order to promote reforms in financial and capital markets in

industries in tandem like two wheels of a cart, enhanced consulting

functions and abilities to assess business performance accurately of

financial institutions should necessarily be improved.

Financial institutions should not rely excessively on the value of

mortgage collateral and guarantees, but instead should consider the

growth potential of borrower enterprises by utilizing techniques such as

Asset Based Lending (ABL) and equity-like debt. Accordingly, financial

institutions should establish their ability to discern the business potential

of borrower enterprises, as well as their consulting and hands-on

support functions, should be enhanced, and financial institutions should

give full support to small and medium-sized enterprises in improving

their business profiles and reinforcing their business structure.

Public finance including public credit guarantees, and private finance,

need to play its part properly to support the respective stages of

development.

From this perspective, the following issues should be addressed

immediately.

When supervising financial institutions, pursuant to the supervisory

policies, the efforts for new loans and the support for business

improvement and recovery are intensively verified. Additionally, in line

with the Financial Monitoring Policy, financing decisions that takes well

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into consideration the growth potential of the debtor ’s business in

addition to the debtor ’s financial soundness is encouraged, and financial

institutions’ asset classification of small and low risk exposures is

respected by on-site inspections. Financial institutions should be

encouraged through these efforts to actively perform their financial

intermediary functions under appropriate risk management.

Furthermore, with the aim to promote business startups and quick

business revitalization, the “Guidelines regarding Personal Guarantees”

was issued on December 5, which establishes that company managers

are not required to provide guarantees themselves when certain

conditions are satisfied. It is important to promote the active utilization

and the establishment of the Guidelines.

With regard to public credit guarantees, it is pointed out that moral

hazard is created for small and medium companies when they

excessively rely on such guarantees, and that the judgments of financial

institutions are spoiled. To break out of 100% guarantees, the special

measures listed in Safety Net Guarantee Program No. 5 should be

promptly reviewed.

In order to foster an environment aimed at private financial

institutions creating new ventures and businesses, as well as to promote

the efforts for improving business management and turnarounds, it is

important that public financial institutions supplement private financial

institutions in these areas.

As the next step, the following issues should be addressed.

In order to provide adequate and sufficient support to companies in

need, support by financial institutions for improvement of SME’s

business profiles and reinforcement of business structure should be

expanded and established, and the experience should be accumulated

by financial institutions.

4. Developing human resources and establishing a better business

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environment

There is no doubt that human resources are the foundation

supporting Japan’s development of industries and the financial sector,

and that it is what makes it possible to compete in the global markets.

In the eighteenth century, the first futures market in the world, Dojima

Rice Exchange, was created in Japan. We inherit such power of

imagination and creativity, which are great characteristics for conducting

globally sophisticated financial businesses. The following

recommendations with regard to developing high-developed human

resources are made from the viewpoint of utilizing such characteristics.

It is assumed that full efforts are to be made to address the problem

of the low birth rate by promoting the participation of elderly people and

women who are highly motivated and competent, as well as by taking

measures to increase the birth rates.

In 2020, the development of human resources and the recruitment of

highly-skilled human resources from overseas must be pursued

simultaneously to adequately secure international human resources in

terms of both quality and quantity.

To that end, the utmost effort should promptly be devoted to

developing global human resources, with English-language skills a given,

via elementary, secondary, undergraduate, and graduate education, as

well as through in-house education in companies.

As a major premise for human resources strategies, the business

environment must be improved to attract domestic and foreign

high-leveled financial human resources. In the course of developing the

Tokyo market into a global financial center which surpasses other

competitive markets, such as Singapore, Hong Kong and Shanghai, the

whole business conditions, including operation cost, living environment,

and regulations and tax system, should be improved to make Tokyo

competitive. The information-hub function of Tokyo markets should be

enhanced and, at the same time, steps should be taken to enable

Japanese and foreign specialists in international finance, legal affairs

26

and accounting, as well as other highly-skilled personnel, to readily

come to Tokyo. The ability to address matters of financial administration

in English also needs to be bolstered, as does the ability to handle

matters of financial services and corporate management in foreign

languages.

An emphasis on English in elementary and secondary education, and

the internationalization of universities are essential approaches that

need to be initiated right away. Accordingly, efforts must be made to

drastically increase the numbers of Japanese students studying abroad

and foreign students studying in Japan, and substantially expand the

numbers of foreigners and business professionals among university

instructors as well. It is also important to utilize private-sector experts,

particularly senior, more experienced professionals with a wealth of

business and overseas experience, in elementary and secondary

education.

In addition to accelerating the enhancement of English-language and

IT skills in public and private institutions related to financial services,

financial-related laws, ordinances, and guidelines should all be

translated into English. For example, there are still subordinate

regulations of financial-related statutes such as the Financial

Instruments and Exchange Act that have not been translated into English.

Moreover, even when the laws and regulations themselves have been

translated into English, there is often a shortage of English-language

materials available for interpreting these laws and regulations, a problem

that must be addressed promptly.

The following issues should be addressed over the medium term.

It is crucial to improve the foreign-language skills of human

resources in financial businesses. In the future, in addition to developing

human resources capable of providing international financial services, it

will be essential to develop global managers capable of bringing out the

potential of their highly-professional subordinates. To this end, financial

institutions should actively dispatch personnel to foreign branches. At

the same time, development of domestic human resources by utilizing

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highly-skilled foreign professionals through attracting foreign financial

institutions and fund management offices, and active hiring of competent

foreign personnel at Japanese financial institutions would also be

effective measures. In this regard, hiring systems should be made more

flexible to facilitate the recruitment of highly-professional human

resources. Career systems also need to be revised to develop IT

personnel for the financial sector.

With regard to the establishment of a business environment

necessary for human resources strategies, Tokyo should foster an

environment better than that in other international financial centers. For

this purpose, a comprehensive policy, including the Special Zone system,

should be considered to encourage foreign financial institutions to

establish offices in Japan and to secure domestic and foreign

highly-professional financial human resources in Tokyo. In addition,

better access to airports is among the improvements that should be

made, and the living environment should be upgraded by expanding

international schools and increasing the number of hospitals capable of

treating patients in English. At the same time, visa conditions should

be eased to accept finance-related professionals, such as financial

specialists, attorneys, and accountants, as well as physicians, nannies

and other personnel serving the day-to-day needs of these professionals

in Japan. The FSA should also provide a one-stop service in English for

finance-related administrative procedures.

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5. Conclusion

The panel held discussions with a view of the direction in which

Japan should proceed, and bearing in mind the picture in 2020, compiled

the necessary measures into this recommendation.

The picture in 2020 represents a huge leap forward from the status

quo, and aggressive and bold efforts at an unprecedented level will be

required to realize such picture. At the same time, developing

professional financial human resources and securing human resources

to support ventures and business management, as well as fostering a

global business and living environment, are challenging measures. To

achieve these goals, continuing efforts are required. The

recommendation should be implemented steadily, follow-ups should be

conducted to review the progress, and additional measures should be

considered and aggressively implemented. As such, the panel will

convene even after compiling this recommendation, and will continue to

discuss the particular measures necessary to realize the picture in 2020.